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Copyright © 2011 Pearson Education, Inc.
Foundations of Microeconomics, 5e (Bade/Parkin)
Chapter 17 Oligopoly
17.1 What Is Oligopoly?
1) A firm faces a small number of competitors. This firm is competing in
A) a monopoly.
B) monopolistic competition.
C) an oligopoly.
D) perfect competition.
E) a perfect multi-firm monopoly.
Skill: Level 1: Definition
Section: Checkpoint 17.1
Author: MR
AACSB: Reflective thinking
2) Sammy's Inc. competes with a few other firms because there are natural barriers to entry.
Sammy's operates in
A) a perfectly competitive market.
B) an oligopoly.
C) a monopolistically competitive market.
D) a monopoly.
E) a natural monopolistically competitive market.
Skill: Level 1: Definition
Section: Checkpoint 17.1
Author: CD
AACSB: Reflective thinking
3) Herb's Inc. has a large share of its market and is tempted to collude with the few firms that are
in its market. Herb's operates in
A) an oligopoly.
B) a monopolistically competitive market.
C) a monopoly market.
D) a perfectly competitive market.
E) collusively protected market.
Skill: Level 1: Definition
Section: Checkpoint 17.1
Author: CD
AACSB: Reflective thinking
2
Copyright © 2011 Pearson Education, Inc.
4) Which of the following is found ONLY in oligopoly?
A) producers who sell identical products
B) one firm's actions affect another firm's profit
C) entry into the industry is blocked
D) sellers face a downward sloping demand curve for their product
E) the firm's demand curve is horizontal
Skill: Level 1: Definition
Section: Checkpoint 17.1
Author: TS
AACSB: Reflective thinking
5) Firms in an oligopoly
i. are independent of each others' actions.
ii. can each influence the market price.
iii. charge a price equal to marginal revenue.
A) i only
B) ii only
C) iii only
D) i and iii
E) i, ii, and iii
Skill: Level 1: Definition
Section: Checkpoint 17.1
Author: SA
AACSB: Reflective thinking
6) In an oligopoly, there are
A) many firms and barriers to entry.
B) many firms and no barriers to entry.
C) few firms and barriers to entry.
D) few firms and no barriers to entry.
E) barriers to entry and only one firm.
Skill: Level 1: Definition
Section: Checkpoint 17.1
Author: SB
AACSB: Reflective thinking
3
Copyright © 2011 Pearson Education, Inc.
7) A cartel is
A) a market structure with a small number of large firms.
B) a market structure with a large number of small firms.
C) a group of firms acting together to raise price, decrease output, and increase economic profit.
D) a market with only two firms.
E) another name for an oligopoly.
Skill: Level 1: Definition
Section: Checkpoint 17.1
Author: SB
AACSB: Reflective thinking
8) A group of firms acting together to limit output, raise price, and increase economic profit is a
called a
A) duopoly.
B) monopolistic oligopoly.
C) competitive oligopoly.
D) cartel.
E) multi-firm competitive monopoly.
Skill: Level 1: Definition
Section: Checkpoint 17.1
Author: JC
AACSB: Reflective thinking
9) A cartel is a collusive agreement among a number of firms that is designed to
A) expand output and lower prices but not to a predatory level.
B) restrict output and lower prices to a predatory level.
C) restrict output and raise prices.
D) expand output and raise prices.
E) expand output and lower prices to a predatory level.
Skill: Level 1: Definition
Section: Checkpoint 17.1
Author: JC
AACSB: Reflective thinking
4
Copyright © 2011 Pearson Education, Inc.
10) A cartel is
A) a group of firms selling identical products but at slightly different prices.
B) an agreement among firms to limit output, raise prices, and increase economic profit.
C) the automobile producing industry.
D) the only firm selling a particular product.
E) an illegal agreement among firms which most often arises in monopolistically competitive
markets.
Skill: Level 1: Definition
Section: Checkpoint 17.1
Author: TS
AACSB: Reflective thinking
11) A group of firms that has entered into an agreement to restrict output and increase prices and
profits is called
A) a compliance.
B) a cartel.
C) an oligopoly.
D) a duopoly.
E) a multi-firm monopoly.
Skill: Level 1: Definition
Section: Checkpoint 17.1
Author: MR
AACSB: Reflective thinking
12) If a few oil-producing countries in the Middle East decide to jointly limit the production of
oil,
A) they are forming a cartel.
B) they would like the price of oil to be the same as if the market were perfectly competitive.
C) game theory does not apply to their actions because they are nations, not firms.
D) they will try to operate as a large, monopolistically competitive firm.
E) they will agree to lower the price of oil in order to increase their profits.
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Author: SA
AACSB: Reflective thinking
5
Copyright © 2011 Pearson Education, Inc.
13) Daryl's Inc. has formed a cartel with the two other firms in its industry. In which of the
following market structures does Daryl's operate?
A) monopolistic competition.
B) oligopoly.
C) perfect competition.
D) monopoly.
E) legally protected monopoly.
Skill: Level 3: Using models
Section: Checkpoint 17.1
Author: CD
AACSB: Reflective thinking
14) A cartel is most likely to occur in
A) perfect competition as firms compete by reducing cost.
B) oligopoly as firms act together to raise prices and increase profits.
C) monopolistic competition where firms collude to increase profits.
D) oligopoly as firms compete to lower price and increase their own profits.
E) monopoly because it faces no competition.
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Author: WM
AACSB: Reflective thinking
15) "Duopoly" is
A) another name for monopoly.
B) a special type of monopolistic competition.
C) a two-firm oligopoly.
D) a game with three players.
E) the situation when a firm sets a duo (two) of different prices for its customers.
Skill: Level 1: Definition
Section: Checkpoint 17.1
Author: WM
AACSB: Reflective thinking
6
Copyright © 2011 Pearson Education, Inc.
16) A two-firm oligopoly is called a
A) double monopoly.
B) cartel.
C) duopoly.
D) monopolistic oligopoly.
E) dual-market.
Skill: Level 1: Definition
Section: Checkpoint 17.1
Author: SB
AACSB: Reflective thinking
17) An oligopoly created because of economies of scale is called a
A) natural oligopoly.
B) legal oligopoly.
C) public oligopoly.
D) monopolistic oligopoly.
E) scale oligopoly.
Skill: Level 1: Definition
Section: Checkpoint 17.1
Author: SB
AACSB: Reflective thinking
18) When economies of scale limit the number of firms in an industry to 3, there is a
A) natural monopoly.
B) natural oligopoly.
C) legal oligopoly.
D) legal cartel.
E) natural monopolistic competition.
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Author: CD
AACSB: Reflective thinking
7
Copyright © 2011 Pearson Education, Inc.
19) There are two bookstores in a college town. If another bookstore opened, each of the stores
would incur an economic loss. This bookstore market is
A) a natural monopoly.
B) a monopoly.
C) monopolistic competition.
D) a natural oligopoly.
E) a legal oligopoly.
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Author: CD
AACSB: Reflective thinking
20) A firm faces a small number of competitors. This firm is competing in
A) a monopoly.
B) monopolistic competition.
C) an oligopoly.
D) perfect competition.
E) a perfect multi-firm monopoly.
Skill: Level 1: Definition
Section: Checkpoint 17.1
Author: MR
AACSB: Reflective thinking
21) If an industry has an HHI of 2,500, the market structure is that of
A) a monopoly.
B) monopolistic competition.
C) an oligopoly.
D) perfect competition.
E) either monopoly or perfect competition, depending on the existence or absence of barriers to
entry.
Skill: Level 1: Definition
Section: Checkpoint 17.1
Author: DD
AACSB: Reflective thinking
8
Copyright © 2011 Pearson Education, Inc.
22) The figure above shows the market demand curve and the ATC curve for a firm. If all firms
in the market have the same ATC curve, the efficient scale for one firm is ________ units per
hour.
A) 2,000
B) 4,000
C) 8,000
D) 10,000
E) more than 10,000
Skill: Level 3: Using models
Section: Checkpoint 17.1
Author: CD
AACSB: Analytical reasoning
9
Copyright © 2011 Pearson Education, Inc.
23) The figure above shows the market demand curve and the ATC curve for a firm. If all firms
in the market have the same ATC curve, the lowest price at which a firm could stay in business in
the long run is ________ per unit and the quantity demanded in the market at that price is
________ units per hour.
A) $20; 4,000
B) $10; 8,000
C) $10; 4,000
D) $20; 2,000
E) $20; 8,000
Skill: Level 3: Using models
Section: Checkpoint 17.1
Author: CD
AACSB: Analytical reasoning
24) The figure above shows the market demand curve and the ATC curve for a firm. If all firms
in the market have the same ATC curve, the figure shows a ________ can profitably operate.
A) natural monopoly in which 1 firm
B) natural oligopoly in which 2 firms
C) natural oligopoly in which 3 firms
D) natural oligopoly in which 4 firms
E) natural oligopoly in which 5 more firms
Skill: Level 3: Using models
Section: Checkpoint 17.1
Author: CD
AACSB: Analytical reasoning
25) The figure above shows the market demand curve and the ATC curve for a firm. If all firms
in the market have the same ATC curve, economies of scale limit the market to ________
firm(s).
A) 1
B) 2
C) 3
D) 4
E) 8
Skill: Level 3: Using models
Section: Checkpoint 17.1
Author: CD
AACSB: Analytical reasoning
10
Copyright © 2011 Pearson Education, Inc.
26) The figure above shows the market demand curve and the ATC curve for a firm. If all firms
in the market have the same ATC curve, the efficient scale for one firm is ________ units per
hour.
A) 2,000
B) 4,000
C) 8,000
D) 6,000
E) 10,000
Skill: Level 3: Using models
Section: Checkpoint 17.1
Author: CD
AACSB: Analytical reasoning
11
Copyright © 2011 Pearson Education, Inc.
27) The figure above shows the market demand curve and the ATC curve for a firm. If all firms
in the market have the same ATC curve, the lowest price at which a firm could stay in business in
the long run is ________ per unit and the quantity demanded in the market at that price is
________ units per hour.
A) $15; 6,000
B) $10; 8,000
C) $10; 6,000
D) $25; 2,000
E) $10; 4,000
Skill: Level 3: Using models
Section: Checkpoint 17.1
Author: CD
AACSB: Analytical reasoning
28) The figure above shows the market demand curve and the ATC curve for a firm. If all firms
in the market have the same ATC curve, the figure shows a ________ can profitably operate.
A) natural monopoly in which 1 firm
B) natural monopoly in which 2 firms
C) natural oligopoly in which 3 firms
D) natural oligopoly in which 2 firms
E) natural oligopoly in which 8 firms
Skill: Level 3: Using models
Section: Checkpoint 17.1
Author: CD
AACSB: Analytical reasoning
29) The figure above shows the market demand curve and the ATC curve for a firm. If all firms
in the market have the same ATC curve, economies of scale limit the market to ________
firm(s).
A) 1
B) 2
C) 3
D) 4
E) 8
Skill: Level 3: Using models
Section: Checkpoint 17.1
Author: CD
AACSB: Analytical reasoning
12
Copyright © 2011 Pearson Education, Inc.
30) When a city licenses only 3 taxi firms to serve the market, the city has created a
A) cartel.
B) legal monopoly.
C) monopolistically competitive market.
D) legal oligopoly.
E) natural oligopoly.
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Author: CD
AACSB: Reflective thinking
31) Oligopoly is a market structure in which
A) many firms each produce a slightly differentiated product.
B) one firm produces a unique product.
C) a small number of firms compete.
D) many firms produce an identical product.
E) the number of firms is so small that they do not compete with each other.
Skill: Level 1: Definition
Section: Checkpoint 17.1
Author: STUDY GUIDE
AACSB: Reflective thinking
32) The fact that firms in oligopoly are interdependent means that
A) there are barriers to entry.
B) one firm's profits are affected by other firms' actions.
C) they can produce either identical or differentiated goods.
D) there are too many of them for any one firm to influence price.
E) they definitely compete with each other so that the price is driven down to the monopoly
level.
Skill: Level 1: Definition
Section: Checkpoint 17.1
Author: STUDY GUIDE
AACSB: Reflective thinking
13
Copyright © 2011 Pearson Education, Inc.
33) Collusion results when a group of firms
i. act separately to limit output, lower prices, and decrease economic profits.
ii. act together to limit output, raise prices, and increase economic profits.
iii. in the United States legally fix prices.
A) i only
B) ii only
C) iii only
D) i and iii
E) ii and iii
Skill: Level 1: Definition
Section: Checkpoint 17.1
Author: STUDY GUIDE
AACSB: Reflective thinking
34) A cartel is a group of firms
A) acting separately to limit output, lower price, and decrease economic profit.
B) acting together to limit output, raise price, and increase economic profit.
C) legally fixing prices.
D) acting together to erect barriers to entry.
E) that compete primarily with each other rather than the other firms in the market.
Skill: Level 1: Definition
Section: Checkpoint 17.1
Author: STUDY GUIDE
AACSB: Reflective thinking
35) A market with only two firms is called a
A) duopoly.
B) two-firm monopolistic competition.
C) two-firm monopoly.
D) cartel.
E) two-firm quasi monopoly.
Skill: Level 1: Definition
Section: Checkpoint 17.1
Author: STUDY GUIDE
AACSB: Reflective thinking
14
Copyright © 2011 Pearson Education, Inc.
36) The efficient scale of one firm is 20 units and the average total cost at the efficient scale is
$30. The quantity demanded in the market as a whole at $30 is 40 units. This market is
A) a natural duopoly.
B) a legal duopoly.
C) a natural monopoly.
D) a legal monopoly.
E) monopolistically competitive.
Skill: Level 1: Definition
Section: Checkpoint 17.1
Author: STUDY GUIDE
AACSB: Reflective thinking
37) Even though four firms can profitably sell hotdogs downtown, the government licenses only
two firms. This market is a
A) natural duopoly.
B) legal duopoly.
C) natural monopoly.
D) legal monopoly.
E) market-limited oligopoly.
Skill: Level 1: Definition
Section: Checkpoint 17.1
Author: STUDY GUIDE
AACSB: Reflective thinking
38) To determine if a market is an oligopoly, we need to determine if
A) the market's HHI is less than 900.
B) there are many firms in the market.
C) the firms are so few that they recognize their mutual interdependencies.
D) the firms make identical or differentiated products.
E) cartels are legal in their market.
Skill: Level 1: Definition
Section: Checkpoint 17.1
Author: STUDY GUIDE
AACSB: Reflective thinking
15
Copyright © 2011 Pearson Education, Inc.
17.2 The Oligopolist's Dilemma
1) When oligopolies seek to operate as a single-price monopoly, the firms produce at the point
where:
A) P = MC.
B) MR = MC.
C) P < ATC.
D) P = MR.
E) MC = ATC.
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Author: DD
AACSB: Reflective thinking
2) When firms in an oligopoly successfully collude and do not cheat on a cartel agreement, they
can achieve long-run economic profit similar to
A) perfect competition.
B) monopoly.
C) monopolistic competition.
D) non-colluding oligopolies.
E) the firms in regulated industries.
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Author: PH
AACSB: Reflective thinking
3) If firms in an oligopolistic industry successfully collude and form a cartel, what price and
output will result?
A) the monopoly price and output
B) the competitive price and output
C) the monopolistically competitive price and output
D) a price higher than the monopoly price and, because there is more than one firm in the
industry, more output than the monopoly amount
E) a price lower than the competitive price and, because there are only a few firms in the
industry, less output than the competitive amount
Skill: Level 3: Using models
Section: Checkpoint 17.2
Author: TS
AACSB: Reflective thinking
16
Copyright © 2011 Pearson Education, Inc.
4) When oligopolies operate like firms in perfect competition, the firms produce at the point
where the
A) price is less than the marginal cost.
B) marginal cost equals the price.
C) price exceeds the marginal cost by the greatest amount.
D) price exceeds the average total cost by the greatest amount.
E) marginal cost equals the average total cost.
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Author: DD
AACSB: Reflective thinking
5) If firms in an oligopolistic industry consistently cut their price to sell more output, what price
and output will result?
A) the monopoly price and output
B) the competitive price and output
C) the monopolistically competitive price and output
D) a price lower than the competitive price and less output than the competitive amount
E) a price lower than the competitive price and more output than the competitive amount
Skill: Level 3: Using models
Section: Checkpoint 17.2
Author: TS
AACSB: Reflective thinking
6) The range in which a duopoly's output falls is less than or equal to the output level in
________ and more than or equal to the output level in ________.
A) monopolistic competition; monopoly
B) monopolistic competition; perfect competition
C) perfect competition; monopoly
D) monopoly; monopolistic competition
E) monopoly; perfect competition
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Author: SA
AACSB: Reflective thinking
17
Copyright © 2011 Pearson Education, Inc.
7) In an oligopoly, output is
A) less than the output in monopoly.
B) greater than the output in perfect competition.
C) in all circumstances the same as the output in perfect competition.
D) somewhere between the output in monopoly and that in perfect competition outcomes.
E) in all circumstances the same as the output in monopoly.
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Author: SB
AACSB: Reflective thinking
8) The possible alternatives for an oligopoly range from the monopoly case with ________ to the
perfectly competitive case with ________.
A) high output; low output
B) low prices; high prices
C) low profits; high profits
D) low output; high output
E) no cooperation among the firms; much cooperation among the firms
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Author: WM
AACSB: Reflective thinking
18
Copyright © 2011 Pearson Education, Inc.
9) The above figure shows the market demand curve for long-distance telephone calls. Suppose
the marginal cost of a long-distance telephone call is 2¢ a minute for a call no matter how many
minutes of calls are made and there are 3 firms in the industry. If the firms in the industry operate
as perfect competitors, there are ________ minutes of calls made per hour.
A) between 0 and 3 million
B) more than 3 million and less than or equal to 5 million
C) more than 5 million and less than or equal to 7 million
D) more than 7 million and less than or equal to 9 million
E) more than 9 million
Skill: Level 3: Using models
Section: Checkpoint 17.2
Author: CD
AACSB: Analytical reasoning
19
Copyright © 2011 Pearson Education, Inc.
10) The above figure shows the market demand curve for long-distance telephone calls. Suppose
the marginal cost of a long-distance telephone call is 2¢ a minute for a call no matter how many
minutes of calls are made and there are 3 firms in the industry. If the firms in the industry operate
as a monopoly, there are ________ minutes of calls made per hour.
A) between 0 and 3 million
B) more than 3 million and less than or equal to 5 million
C) more than 5 million and less than or equal to 7 million
D) more than 7 million and less than or equal to 9 million
E) more than 9 million
Skill: Level 3: Using models
Section: Checkpoint 17.2
Author: CD
AACSB: Analytical reasoning
11) The above figure shows the market demand curve for long-distance telephone calls. Suppose
the marginal cost of a long-distance telephone call is 2¢ a minute for a call no matter how many
minutes of calls are made and there are 3 firms in the industry. If the firms in the industry operate
as perfect competitors, the price of a call is ________ per minute and if the firms in the industry
operate as a monopoly, the price of a call is ________ per minute.
A) 2 cents; more than 3 cents and less than 4 cents
B) more than 3 cents and less than 4 cents; more than 3 cents and less than 4 cents
C) 1 cents; 2 cents
D) 2 cents; either equal to 4 cents or more than 4 cents
E) either equal to 4 cents or more than 4 cents; 2 cents
Skill: Level 3: Using models
Section: Checkpoint 17.2
Author: CD
AACSB: Analytical reasoning
20
Copyright © 2011 Pearson Education, Inc.
12) Which of the following statements is correct?
A) A firm in oligopoly will charge a price that is lower than the price charged in perfect
competition.
B) If firms in oligopoly look only at their own self-interest in deciding the output they should
produce, the total market output will exceed that of a monopoly.
C) If one oligopolist reduces the price of its product, its demand curve shifts leftward.
D) Because many producers join to form a cartel, the market becomes monopolistic competition.
E) It is in the self-interest of each firm in an oligopoly to take the actions that maximize all the
firms' joint profit.
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Author: SA
AACSB: Reflective thinking
13) The major dilemma facing Boeing and Airbus is the
A) fact that neither will respond to the behavior of the other.
B) certainty surrounding the reaction of each firm to the behavior of the other firm.
C) fact that if each firm separately tries to maximize its profit, it might wind up with less profit
that otherwise.
D) competition from other firms that drives their economic profit to zero.
E) fact that when they collude to maximize their profit, the other firm's profit might be larger
than its profit.
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Author: JC
AACSB: Reflective thinking
14) Imagine a duopoly in which two firms, A and B, produce the monopoly profit-maximizing
output and equally share the economic profit. If firm A increases output,
A) both firms' profits increase.
B) firm A's profits increase and firm B's profits decrease.
C) firm B's profits increase and firm A's profits decrease.
D) both firms' profits decrease.
E) firm A's profits increase and firm B's profits do not change.
Skill: Level 3: Using models
Section: Checkpoint 17.2
Author: SB
AACSB: Reflective thinking
21
Copyright © 2011 Pearson Education, Inc.
15) Imagine a duopoly in which two firms, A and B, produce the monopoly profit-maximizing
output and equally share the economic profit. If firm A increases its output, the market price
________ and total economic profit of the two firms combined ________.
A) falls; decreases
B) falls; increases
C) rises; decreases
D) rises; increases
E) falls; does not change
Skill: Level 3: Using models
Section: Checkpoint 17.2
Author: SB
AACSB: Reflective thinking
16) If one firm in a duopoly increases its production by one unit beyond the monopoly output,
that firm's profit ________, the other firm's profit ________, and the total profit of the duopoly
________.
A) increases; increases; increases
B) does not change; does not change; does not change
C) increases; decreases; does not change
D) increases; does not change; increases
E) increases; decreases; decreases
Skill: Level 3: Using models
Section: Checkpoint 17.2
Author: MR
AACSB: Reflective thinking
22
Copyright © 2011 Pearson Education, Inc.
17) Which of the following is true? In the above figure, if the market is
A) a monopoly, output will be Q1 and price will be P3.
B) a monopoly, output will be Q3 and price will be P3.
C) perfect competition, output will be Q2 and price will be P2.
D) perfect competition, output will be Q1 and price will be P1.
E) perfect competition, output will be Q3 and price will be P3.
Skill: Level 3: Using models
Section: Checkpoint 17.2
Author: SA
AACSB: Analytical reasoning
18) In the above figure, the output of an oligopoly will range between
A) 0 and Q1.
B) Q1 and Q2.
C) Q1 and Q3.
D) Q2 and Q3.
E) 0 and Q2.
Skill: Level 3: Using models
Section: Checkpoint 17.2
Author: SA
AACSB: Analytical reasoning
23
Copyright © 2011 Pearson Education, Inc.
19) Boeing and Airbus have entered into a cartel agreement that will enable them to boost their
profits. What occurs if Boeing decides to cheat on the agreement?
i. Boeing lowers the price of its airplanes.
ii. The total industry output increases.
iii. The total profits in the airplane industry will decrease.
A) i only
B) ii only
C) iii only
D) i and ii
E) i, ii, and iii
Skill: Level 3: Using models
Section: Checkpoint 17.2
Author: MR
AACSB: Reflective thinking
20) For a duopoly, the highest price is charged when the duopoly achieves
A) the competitive outcome.
B) the monopoly outcome.
C) an outcome between the competitive outcome and the monopoly outcome.
D) its noncooperative Nash equilibrium.
E) Both answers A and D are correct because both refer to the same price.
Skill: Level 3: Using models
Section: Checkpoint 17.2
Author: STUDY GUIDE
AACSB: Reflective thinking
21) For a duopoly, the smallest total quantity is produced when the duopoly achieves
A) the competitive outcome.
B) the monopoly outcome.
C) an outcome between the competitive outcome and the monopoly outcome.
D) its noncooperative Nash equilibrium.
E) Both answers A and D are correct because both refer to the same amount of output.
Skill: Level 3: Using models
Section: Checkpoint 17.2
Author: STUDY GUIDE
AACSB: Reflective thinking
24
Copyright © 2011 Pearson Education, Inc.
22) For a duopoly, the maximum total profit is reached when the duopoly produces
A) the same amount of output as the competitive outcome.
B) the same amount of output as the monopoly outcome.
C) an amount of output that lies between the competitive outcome and the monopoly outcome.
D) more output than the competitive outcome.
E) less output than the monopoly outcome.
Skill: Level 3: Using models
Section: Checkpoint 17.2
Author: STUDY GUIDE
AACSB: Reflective thinking
23) If a duopoly has reached the monopoly outcome, a firm can increase its profit by if it and it
alone ________ its price and ________ its production.
A) raises; increases
B) raises; decreases
C) lowers; increases
D) lowers; decreases
E) raises; does not change
Skill: Level 3: Using models
Section: Checkpoint 17.2
Author: STUDY GUIDE
AACSB: Reflective thinking
24) If a duopoly has reached the monopoly outcome and only one firm increases its production,
that firm's profit ________ and the other firm's profit ________.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
E) increases; does not change
Skill: Level 3: Using models
Section: Checkpoint 17.2
Author: STUDY GUIDE
AACSB: Reflective thinking
25
Copyright © 2011 Pearson Education, Inc.
25) Suppose a duopoly had reached the monopoly outcome and then the first firm increased its
production. If the second firm next increases its production, the second firm's profit ________
and the first firm's profit ________.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
E) increases; does not change
Skill: Level 3: Using models
Section: Checkpoint 17.2
Author: STUDY GUIDE
AACSB: Reflective thinking
26) If both firms in a duopoly increase their production by one unit beyond the monopoly output,
each firm's profit ________ and the total profit of the duopoly ________.
A) increases; increases
B) does not change; does not change
C) decreases; decreases
D) does not change; increases
E) decreases; does not change
Skill: Level 3: Using models
Section: Checkpoint 17.2
Author: STUDY GUIDE
AACSB: Reflective thinking
27) The very best joint outcome possible for the firms in a duopoly is to produce the
A) monopoly level of output.
B) perfectly competitive level of output.
C) amount of output that maximizes total revenue.
D) amount of output that minimizes total cost.
E) Nash equilibrium level of output if the game is not repeated.
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Author: STUDY GUIDE
AACSB: Reflective thinking
26
Copyright © 2011 Pearson Education, Inc.
17.3 Game Theory
1) The tool that economists use to analyze the mutual interdependence of oligopolies is
A) economies of scale.
B) the four-firm concentration ratio.
C) game theory.
D) the HHI.
E) the efficient scale.
Skill: Level 1: Definition
Section: Checkpoint 17.3
Author: DD
AACSB: Reflective thinking
2) Game theory is the tool that economists use to analyze strategic behavior, which is behavior
that takes into account the ________ behavior of others and the mutual recognition of ________.
A) unexpected; interdependence
B) unexpected; independence
C) expected; interdependence
D) expected; independence
E) random; profit
Skill: Level 1: Definition
Section: Checkpoint 17.3
Author: JC
AACSB: Reflective thinking
3) Game theory is used to analyze the interactions among firms in ________.
A) oligopoly
B) perfect competition
C) monopoly
D) monopolistic competition
E) Both answers A and D are correct.
Skill: Level 1: Definition
Section: Checkpoint 17.3
Author: CD
AACSB: Reflective thinking
27
Copyright © 2011 Pearson Education, Inc.
4) Economists use game theory to analyze strategic behavior, which takes into account
A) monopoly situations.
B) the expected behavior of others and the recognition of mutual interdependence.
C) the price-taking behavior of oligopolists.
D) non-price competition.
E) that increased demand decreases the market power of the firms in the market.
Skill: Level 1: Definition
Section: Checkpoint 17.3
Author: PH
AACSB: Reflective thinking
5) The concepts of mutual interdependence and game theory illustrate the fact that firms
competing in oligopoly
A) consider the actions of the rivals before changing the price of their product.
B) ignore the actions of their rivals when considering price changes.
C) engage in frequent price changes.
D) never change prices.
E) will mutually determine the combined best outcome for all players.
Skill: Level 2: Using definitions
Section: Checkpoint 17.3
Author: PH
AACSB: Reflective thinking
6) All games have which features?
A) prices, rules, and payoffs
B) rules, markets, and prices
C) rules, strategies, and payoffs
D) rules, strategies, and costs
E) equilibrium, prices, and quantities
Skill: Level 1: Definition
Section: Checkpoint 17.3
Author: JC
AACSB: Reflective thinking
28
Copyright © 2011 Pearson Education, Inc.
7) The players in a game theory situation often do not act in their joint interest because of which
of the following?
A) They do not realize the benefit of cooperation.
B) Players strive to minimize their opponents' profits.
C) Players do not understand the game and its payoffs.
D) It is not in each player's self-interest to cooperate.
E) Players understand the game but they do not know which action(s) will benefit their joint
interest.
Skill: Level 4: Applying models
Section: Checkpoint 17.3
Author: TS
AACSB: Reflective thinking
8) A Nash equilibrium
i. is named after the Nobel prize winning economist, John Nash.
ii. occurs when each player chooses the best strategy given the strategy of the other player.
iii. must give the best possible outcome for each player.
A) i only
B) ii only
C) iii only
D) i and ii
E) ii and iii
Skill: Level 1: Definition
Section: Checkpoint 17.3
Author: SA
AACSB: Reflective thinking
9) A Nash equilibrium is defined as
A) earning zero economic profit in the long run.
B) forming a cartel with strong penalties for cheaters.
C) relying on other game players to realize the benefit of cooperation.
D) each player taking the best possible action given the action of the other player.
E) each player taking the action that is best for all the players.
Skill: Level 1: Definition
Section: Checkpoint 17.3
Author: TS
AACSB: Reflective thinking
29
Copyright © 2011 Pearson Education, Inc.
10) A Nash equilibrium occurs when each player in a game takes the ________ given the action
of the other player.
A) worst possible action for himself or herself
B) best possible action for himself or herself
C) most unpredictable possible action
D) most mutually beneficial possible action
E) best possible action for the other player
Skill: Level 1: Definition
Section: Checkpoint 17.3
Author: JC
AACSB: Reflective thinking
11) A Nash equilibrium in the duopoly game
A) means that one player has greater market power.
B) occurs when each player takes the best possible action regardless of the strategy chosen by
other firms.
C) will always lead to equilibrium in which the firms' total profit is the largest.
D) can occur only if firms cooperate with each other.
E) means that a firm must be able to determine its actions and the actions of its competitor.
Skill: Level 2: Using definitions
Section: Checkpoint 17.3
Author: SA
AACSB: Reflective thinking
12) The prisoners' dilemma is an example of
A) product differentiation.
B) collusion.
C) game theory.
D) monopolistic competition.
E) decision making in a monopoly.
Skill: Level 1: Definition
Section: Checkpoint 17.3
Author: SB
AACSB: Reflective thinking
30
Copyright © 2011 Pearson Education, Inc.
13) The prisoners' dilemma is
A) an example of a duopoly game.
B) a theory about why firms break the law.
C) competition that can occur among firms in monopolistic competition.
D) an example of the monopolist charging high prices.
E) an example of a game that does not have a Nash equilibrium.
Skill: Level 1: Definition
Section: Checkpoint 17.3
Author: WM
AACSB: Reflective thinking
14) In the prisoners' dilemma, each player is ________ regardless of the other player's actions.
A) forced to confess
B) forced to deny
C) better off confessing
D) better off denying
E) going to go free
Skill: Level 3: Using models
Section: Checkpoint 17.3
Author: SB
AACSB: Reflective thinking
15) The equilibrium in the prisoners' dilemma
i. minimizes the prisoners' combined jail time.
ii. has one prisoner confessing and the other denying.
iii. is a Nash equilibrium.
A) i only
B) ii only
C) iii only
D) i and iii
E) i, ii, and iii
Skill: Level 3: Using models
Section: Checkpoint 17.3
Author: SB
AACSB: Reflective thinking
31
Copyright © 2011 Pearson Education, Inc.
16) In a prisoners' dilemma game, in the Nash equilibrium
A) neither player gets his or her best outcome.
B) both players get their best outcome.
C) one player gets his or her best outcome and the other player does not.
D) collusion would not alter the outcome.
E) Either answer A or C might be correct depending on whether the players communicate with
each other or do not communicate with each other.
Skill: Level 2: Using definitions
Section: Checkpoint 17.3
Author: MR
AACSB: Reflective thinking
17) The table above shows the payoff matrix offered to two suspected criminals, Bonnie and
Clyde. The payoffs are the years they will spend in prison. The suspected criminals are not
allowed to communicate. Given the information in the payoff matrix, the Nash equilibrium is
that Bonnie ________ and Clyde ________.
A) confesses; denies
B) confesses; confesses
C) denies; denies
D) denies; confesses
E) denies; either confess or denies, either outcome is consistent with the Nash equilibrium.
Skill: Level 4: Applying models
Section: Checkpoint 17.3
Author: CD
AACSB: Analytical reasoning
32
Copyright © 2011 Pearson Education, Inc.
18) The table above shows the payoff matrix offered to two suspected criminals, Bonnie and
Clyde. The payoffs are the years they will spend in prison. The suspected criminals are not
allowed to communicate. Given the information in the payoff matrix, the Nash equilibrium is
A) Bonnie confesses only if she thinks Clyde denies committing the crime.
B) Clyde confesses only if he thinks Bonnie denies committing the crime.
C) both Bonnie and Clyde confess to the crime.
D) both Bonnie and Clyde deny committing the crime.
E) Clyde confesses and Bonnie might either confess or not confess, either outcome is consistent
with the Nash equilibrium.
Skill: Level 4: Applying models
Section: Checkpoint 17.3
Author: CD
AACSB: Analytical reasoning
19) The table above shows the payoff matrix offered to two suspected criminals, Bonnie and
Clyde. The payoffs are the years they will spend in prison. The suspected criminals are not
allowed to communicate. Which of the following statements correctly describes the equilibrium
choices made by Bonnie and Clyde?
A) The Nash equilibrium is the best outcome for Bonnie and Clyde.
B) There is no equilibrium in this game.
C) In the Nash equilibrium, both Bonnie and Clyde deny committing the crime.
D) Bonnie and Clyde could improve upon the Nash equilibrium if they could communicate.
E) Bonnie and Clyde get the best outcome for themselves because they are not allowed to
communicate.
Skill: Level 4: Applying models
Section: Checkpoint 17.3
Author: CD
AACSB: Analytical reasoning
33
Copyright © 2011 Pearson Education, Inc.
20) The prisoners' dilemma is similar to the problem faced by firms in an oligopoly in the United
States because
A) mutual interdependence exists, and collusion is illegal in the United States, so the firms
cannot legally communicate.
B) collusion is legal in the United States, and firms can communicate their pricing decisions to
each other.
C) failure to cooperate leads to better outcomes than cooperation.
D) private prisons are run by oligopolies.
E) the firms can communicate but mutual interdependence exists.
Skill: Level 2: Using definitions
Section: Checkpoint 17.3
Author: PH
AACSB: Reflective thinking
21) In an oligopoly in which the firms have entered into a cartel agreement, the Nash equilibrium
exhibits which of the following?
A) firms jointly maximizing profits
B) the firms cheating on the cartel agreement, which benefits society
C) production at a price and output level close to monopolistic competition in the long run
D) the firms cheating on the cartel agreement, which harms society
E) one firm cheating on the cartel agreement and the other firms complying with the cartel
agreement.
Skill: Level 2: Using definitions
Section: Checkpoint 17.3
Author: TS
AACSB: Reflective thinking
34
Copyright © 2011 Pearson Education, Inc.
22) Suppose MCI and AT&T can each charge either 3¢ or 4¢ a minute for a long distance call.
The above table illustrates the payoffs, in millions of dollars, from each of the four possible
outcomes that could occur in their duopoly setting. If MCI charges 4¢ a minute and AT&T
charges 4¢ a minute, then MCI's profit will be ________ million and AT&T's profit will be
________ million.
A) $320; $320
B) $200; $500
C) $500; $200
D) $450; $450
E) $320; $500
Skill: Level 2: Using definitions
Section: Checkpoint 17.3
Author: JC
AACSB: Analytical reasoning
23) Suppose MCI and AT&T can each charge either 3¢ or 4¢ a minute for a long distance call.
The above table illustrates the payoffs, in millions of dollars, from each of the four possible
outcomes that could occur in their duopoly setting. What must MCI's price be for AT&T to earn
$500 million in profit?
A) 4¢ a minute
B) 3¢ a minute
C) 0¢ a minute
D) either 4¢ or 3¢ a minute because AT&T earns $500 million in profit either way
E) None of the above answers is correct because the payoff matrix shows that it is not possible
for AT&T to earn $500 million in profit
Skill: Level 2: Using definitions
Section: Checkpoint 17.3
Author: JC
AACSB: Analytical reasoning
35
Copyright © 2011 Pearson Education, Inc.
24) Suppose MCI and AT&T can each charge either 3¢ or 4¢ a minute for a long distance call.
The above table illustrates the payoffs, in millions of dollars, from each of the four possible
outcomes that could occur in their duopoly setting. If MCI charges 3¢ a minute and AT&T
charges 4¢ a minute, then MCI's profit will be ________ million and AT&T's profit will be
________ million.
A) $320; $320
B) $200; $500
C) $500; $200
D) $450; $450
E) $320; $450
Skill: Level 2: Using definitions
Section: Checkpoint 17.3
Author: JC
AACSB: Analytical reasoning
25) Long-run economic profits are most likely to be earned in
A) perfect competition and oligopoly.
B) perfect competition and monopoly.
C) monopoly and oligopoly.
D) oligopoly and monopolistic competition.
E) perfect competition and monopolistic competition.
Skill: Level 2: Using definitions
Section: Checkpoint 17.3
Author: PH
AACSB: Reflective thinking
26) If two duopolists can stick to a cartel agreement to boost their prices, then both
A) earn greater profits than if they did not collude.
B) price at marginal cost.
C) price below average total cost.
D) decrease their economic profits.
E) increase their production so that each produces more than if they did not collude.
Skill: Level 2: Using definitions
Section: Checkpoint 17.3
Author: MR
AACSB: Reflective thinking
36
Copyright © 2011 Pearson Education, Inc.
27) If an oligopolistic game is repeatedly played, which of the following can occur?
A) players can learn ways to cooperate and earn an economic profit
B) the competitive price and output consistently is the final result
C) firms can learn how to cheat more effectively on the other player
D) one firm will be driven out of business
E) An implicit agreement is reached in which one firm constantly cheats on the cartel and the
other firm complies with it.
Skill: Level 3: Using models
Section: Checkpoint 17.3
Author: TS
AACSB: Reflective thinking
28) The only two firms in a market are trying to decide what price to charge. The payoff matrix
for this duopoly game is shown above. The payoffs are thousands of dollars of economic profit.
In the Nash equilibrium, Firm A will set a price of ________ and Firm B will set a price of
________.
A) $10; $20
B) $20; $10
C) $10; $10
D) $20; $20
E) $20; something, but more information is needed to determine Firm B's price
Skill: Level 4: Applying models
Section: Checkpoint 17.3
Author: SA
AACSB: Analytical reasoning
37
Copyright © 2011 Pearson Education, Inc.
29) The only two firms in a market are trying to decide what price to charge. The payoff matrix
for this duopoly game is shown above. The payoffs are thousands of dollars of economic profit.
In the above game, in the Nash equilibrium,
A) Firm A and Firm B are both making $40,000 in economic profit.
B) Firm A and Firm B are both making $55,000 in economic profit.
C) Firm A is making $60,000 and Firm B is making $55,000 in economic profit.
D) Firm A and Firm B are both making $60,000 in economic profit.
E) Firm A and Firm B are both making $35,000 in economic profit.
Skill: Level 4: Applying models
Section: Checkpoint 17.3
Author: SA
AACSB: Analytical reasoning
30) The only two firms in a market are trying to decide what price to charge. The payoff matrix
for this duopoly game is shown above. The payoffs are thousands of dollars of economic profit.
Which of the following statements is correct?
A) If the firms play this game repeatedly, one would end up charging $20 and the other $10.
B) If the firms cooperate, they could both earn $55,000 in economic profit.
C) The Nash equilibrium in this game is for both firms to set P = $20 because that maximizes
their combined profit.
D) Firm B's strategy is to always set P= $20 because that gives Firm B the highest possible
profit.
E) If Firm B sets P = $20, then Firm A will maximize its profit by setting its P = $20.
Skill: Level 4: Applying models
Section: Checkpoint 17.3
Author: SA
AACSB: Analytical reasoning
38
Copyright © 2011 Pearson Education, Inc.
31) Intel and AMD are a duopoly that produce CPU chips. Intel and AMD can conduct R&D or
they can not conduct R&D. The table above shows the payoff matrix for the two firms. The
numbers are millions of dollars of profit. The Nash equilibrium is for Intel to ________ and for
AMD to ________ .
A) conduct R&D; conduct R&D
B) conduct R&D; not conduct R&D
C) not conduct R&D; conduct R&D
D) not conduct R&D; not conduct R&D
E) conduct R&D; either conduct R&D or not conduct R&D, the equilibrium could be either
choice for AMD
Skill: Level 4: Applying models
Section: Checkpoint 17.3
Author: MR
AACSB: Analytical reasoning
32) Intel and AMD are a duopoly that produce CPU chips. Intel and AMD can conduct R&D or
they can not conduct R&D. The table above shows the payoff matrix for the two firms. If AMD
is playing a tit-for-tat strategy, then if Intel conducted R&D last period, AMD
A) definitely conducts R&D this period.
B) definitely does not conduct R&D this period.
C) might conduct R&D or might not conduct R&D, depending on Intel's profit.
D) might conduct R&D or might not conduct R&D, depending on its profit.
E) might conduct R&D or might not conduct R&D, but more information is needed to determine
its action.
Skill: Level 4: Applying models
Section: Checkpoint 17.3
Author: MR
AACSB: Analytical reasoning
39
Copyright © 2011 Pearson Education, Inc.
33) Intel and AMD are a duopoly that produce CPU chips. Intel and AMD can conduct R&D or
they can not conduct R&D. The table above shows the payoff matrix for the two firms. AMD is
playing a tit-for-tat strategy and Intel did not conduct R&D last period. Then, of the following
answers, Intel's total profit for the next two periods is the highest if Intel ________ R&D this
period and ________ R&D next period.
A) conducts; conducts
B) does not conduct; conducts
C) conducts; does not conduct
D) does not conduct; does not conduct
E) conducts; either conducts or does not conduct because the profit is the same in either case
Skill: Level 4: Applying models
Section: Checkpoint 17.3
Author: MR
AACSB: Analytical reasoning
34) One of the main tools economists use to analyze strategic behavior is
A) the Herfindahl-Hirschman Index.
B) game theory.
C) cartel theory.
D) the collusion index.
E) dual theory, which is used to study duopolies.
Skill: Level 1: Definition
Section: Checkpoint 17.3
Author: STUDY GUIDE
AACSB: Reflective thinking
35) Game theory reveals that
A) the equilibrium might not be the best solution for the parties involved.
B) firms in oligopoly are not interdependent.
C) each player looks after what is best for the industry.
D) if all firms in an oligopoly take the action that maximizes their profit, then the equilibrium
will have the largest possible combined profit of all the firms.
E) firms in an oligopoly choose their actions without regard for what the other firms might do.
Skill: Level 3: Using models
Section: Checkpoint 17.3
Author: STUDY GUIDE
AACSB: Reflective thinking
40
Copyright © 2011 Pearson Education, Inc.
36) A Nash equilibrium occurs
A) when each player acts without considering the actions of the other player.
B) when each player takes the best possible action given the action of the other player.
C) only when players use the tit-for-tat strategy.
D) only when the game is played in Nashville, TN.
E) when each player takes the action that makes the combined payoff for all players as large as
possible.
Skill: Level 1: Definition
Section: Checkpoint 17.3
Author: STUDY GUIDE
AACSB: Reflective thinking
37) The prisoners' dilemma game
A) shows that prisoners are better off if they cooperate.
B) shows it is easy to cooperate.
C) has an equilibrium in which both prisoners are made as well off as possible.
D) would have the same outcome even if the prisoners can communicate and cooperate.
E) has an equilibrium in which one prisoner is made as well off as possible and the other prisoner
is made as worse off as possible.
Skill: Level 2: Using definitions
Section: Checkpoint 17.3
Author: STUDY GUIDE
AACSB: Reflective thinking
38) A collusive agreement to form a cartel is difficult to maintain because
A) each member firm can increase its own profits by cutting its price and selling more.
B) forming a cartel is legal but frowned upon throughout the world.
C) supply will decrease because of the high cartel price.
D) demanders will rebel once they realize a cartel has been formed.
E) each firm can increase its profit if it decreases its production even more than the decrease set
by the cartel.
Skill: Level 2: Using definitions
Section: Checkpoint 17.3
Author: STUDY GUIDE
AACSB: Reflective thinking
41
Copyright © 2011 Pearson Education, Inc.
39) Firms in oligopoly can achieve an economic profit
A) always in the long run.
B) if they cooperate.
C) only if the demand for their products is inelastic.
D) only if the demand for their products is elastic.
E) if they reach the non-cooperative equilibrium.
Skill: Level 3: Using models
Section: Checkpoint 17.3
Author: STUDY GUIDE
AACSB: Reflective thinking
40) When duopoly games are repeated and a "tit for tat" strategy is used,
A) the competitive outcome is more likely to be reached than when the game is played once.
B) the monopoly outcome is more likely to be reached than when the game is played once.
C) both firms begin to incur economic losses.
D) one firm goes out of business.
E) because the game is repeated it is impossible to predict whether the competitive or the
monopoly outcome is more likely.
Skill: Level 2: Using definitions
Section: Checkpoint 17.3
Author: STUDY GUIDE
AACSB: Reflective thinking
41) Oligopoly is
A) always efficient.
B) efficient only if the firms cooperate.
C) efficient only if the firms play non-repeated games.
D) generally not efficient.
E) efficient only if the firms innovate.
Skill: Level 2: Using definitions
Section: Checkpoint 17.3
Author: STUDY GUIDE
AACSB: Analytical reasoning
42
Copyright © 2011 Pearson Education, Inc.
17.4 Antitrust Law
1) The focus of antitrust legislation is to
A) encourage cartels to form because they are easier to regulate.
B) maintain competition.
C) force society to act in the best interest of producers.
D) limit the power of regulatory bodies.
E) ensure that producers earn enough profit to stay in business so that consumers are not harmed
by too many businesses closing.
Skill: Level 2: Using definitions
Section: Checkpoint 17.4
Author: PH
AACSB: Reflective thinking
2) Which of the following are U.S. antitrust laws?
i. The Rockefeller Act
ii. The Sherman Act
iii. The Natural Monopoly Act
A) i and ii
B) ii and iii
C) ii only
D) i, ii, and iii
E) i only
Skill: Level 1: Definition
Section: Checkpoint 17.4
Author: CD
AACSB: Reflective thinking
3) The first antitrust law in the United States was the
A) Sherman Act, passed in 1960.
B) Clayton Act, passed in 1914.
C) Clayton Act, passed in 1830.
D) Sherman Act, passed in 1890.
E) Sherman Act, passed in 1933.
Skill: Level 1: Definition
Section: Checkpoint 17.4
Author: WM
AACSB: Reflective thinking
43
Copyright © 2011 Pearson Education, Inc.
4) Section 1 of the Sherman Antitrust Act declares what to be illegal?
A) every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of
trade or commerce among the several States, or with foreign nations
B) mergers of a horizontal nature
C) any attempt to monopolize an industry
D) sharing of technology among competing firms or mergers where the effect is to lessen
competition
E) exiting an industry if the remaining firm or firms have a market share that is too large.
Skill: Level 1: Definition
Section: Checkpoint 17.4
Author: JC
AACSB: Reflective thinking
5) According to Section 2 of the Sherman Act, which of the following is a felony?
A) mergers of a vertical nature
B) horizontal mergers
C) attempts to monopolize an industry
D) price increases among competing firms that occur simultaneously
E) using the HHI to justify a merger
Skill: Level 1: Definition
Section: Checkpoint 17.4
Author: JC
AACSB: Reflective thinking
6) Which antitrust law has two main provisions, one against conspiring with others to restrict
competition and the other making it a felony to monopolize or attempt to monopolize?
A) Sherman Act
B) Clayton Act
C) Robinson-Patman Act
D) Celter-Kefauver Act
E) Bade-Parkin Act
Skill: Level 1: Definition
Section: Checkpoint 17.4
Author: MR
AACSB: Reflective thinking
44
Copyright © 2011 Pearson Education, Inc.
7) As a result of a wave of mergers in the early part of the twentieth century, which act was
passed?
A) the Anti-Merger Act of 1900
B) the Sherman Act of 1909
C) the Clayton Act of 1914
D) the Horizontal Merger Act of 1919
E) the Pro-Competition Act of 1912
Skill: Level 1: Definition
Section: Checkpoint 17.4
Author: JC
AACSB: Reflective thinking
8) In the United States, antitrust laws
A) do not allow one person to be a director of two competing firms if being a member
"substantially lessens competition".
B) break up a company if it is too large because "size itself is an offense."
C) do not always prosecute firms if they have fixed their prices.
D) regard excess competition as a felony under Section 3 of the Sherman Act.
E) place a maximum limit of 125 firms that are allowed to compete in any market.
Skill: Level 1: Definition
Section: Checkpoint 17.4
Author: SA
AACSB: Reflective thinking
9) Which of the following does antitrust law prohibit if it substantially lessens competition or
creates a monopoly?
i. acquiring a competitor's shares or assets
ii. territorial confinement
iii. becoming a director of a competing firm
A) i only
B) iii only
C) i and iii
D) i and ii
E) i, ii, and iii
Skill: Level 1: Definition
Section: Checkpoint 17.4
Author: TS
AACSB: Reflective thinking
45
Copyright © 2011 Pearson Education, Inc.
10) Under the Clayton Act and its amendments, if it creates monopoly, which of the following
activities is illegal?
A) exit of a firm from a market with 4 or fewer surviving firms
B) price hikes among competing firms
C) price discrimination
D) patents that result in price hikes
E) entry of a firm into a new market
Skill: Level 1: Definition
Section: Checkpoint 17.4
Author: JC
AACSB: Reflective thinking
11) Under the Clayton Act and its amendments, if it creates monopoly, which of the following
activities is illegal?
i. contracts that require other goods to be bought from the same firm
ii. contracts that prevent a buyer from reselling a product outside a specified area
iii. becoming a director of a competing firm
A) i only
B) ii only
C) ii and iii
D) i and iii
E) i, ii, and iii
Skill: Level 1: Definition
Section: Checkpoint 17.4
Author: JC
AACSB: Reflective thinking
12) Tying arrangements
A) require retailers to charge a specific price determined by the manufacturer.
B) require a buyer to purchase one product in order to buy another, different product.
C) are illegal under the Sherman Act.
D) always allow a firm to increase its market power.
E) are always illegal under the Clayton Act.
Skill: Level 1: Definition
Section: Checkpoint 17.4
Author: CD
AACSB: Reflective thinking
46
Copyright © 2011 Pearson Education, Inc.
13) Which of the following is an example of a tying arrangement?
A) preventing a buyer from reselling a product outside a specific area
B) selling one product only if another product is purchased
C) forcing the purchase of all necessities from a single firm
D) prohibiting a seller from selling a competing item
E) selling different units of a good to the same buyer at different prices.
Skill: Level 1: Definition
Section: Checkpoint 17.4
Author: TS
AACSB: Reflective thinking
14) Tying arrangements
A) work only in perfectly competitive markets.
B) are illegal under the Sherman Act.
C) are illegal under the Clayton Act if they create monopoly.
D) are illegal under the Clayton Act and the Sherman Act only if they used along with predatory
pricing.
E) are always illegal under the Clayton Act.
Skill: Level 2: Using definitions
Section: Checkpoint 17.4
Author: CD
AACSB: Reflective thinking
15) If a firm, Best Computer Buys, requires its customers to buy software from it whenever the
customers purchase a computer, the company's policy is called
A) an exclusive deal.
B) a territorial confinement.
C) a tying arrangement.
D) pricing discrimination.
E) predatory pricing.
Skill: Level 1: Definition
Section: Checkpoint 17.4
Author: SA
AACSB: Reflective thinking
47
Copyright © 2011 Pearson Education, Inc.
16) In the 1970s, when a gasoline price ceiling was imposed that was below the equilibrium
price of gasoline, some gas stations required that buyers of gas also purchase other products sold
at the station. This policy is an example of which of the following?
A) price discrimination
B) tying arrangements
C) exclusive dealing
D) requirements contract
E) resale price maintenance
Skill: Level 2: Using definitions
Section: Checkpoint 17.4
Author: TS
AACSB: Reflective thinking
17) Which of the following is an example of exclusive dealing?
A) preventing a buyer from reselling a product outside a specific area
B) forcing a buyer to buy other goods from a supplier
C) forcing the purchase of all necessities from a single firm
D) prohibiting a seller from selling a competing item
E) selling different units of a good to the same buyer at different prices.
Skill: Level 2: Using definitions
Section: Checkpoint 17.4
Author: TS
AACSB: Reflective thinking
18) If Polka Cola prevents all of its retail outlets from selling any other competing soft drink, it is
engaged in
A) a tying agreement.
B) a requirement contracts.
C) an exclusive deal.
D) territorial confinement.
E) resale price maintenance.
Skill: Level 1: Definition
Section: Checkpoint 17.4
Author: MR
AACSB: Reflective thinking
48
Copyright © 2011 Pearson Education, Inc.
19) Which of the following is an example of a territorial confinement?
A) preventing a buyer from reselling a product outside a specific area
B) selling one product only if another product is purchased
C) forcing the purchase of all necessities from a single firm
D) prohibiting a seller from selling a competing item
E) selling different units of a good at different prices to the same customer
Skill: Level 2: Using definitions
Section: Checkpoint 17.4
Author: TS
AACSB: Reflective thinking
20) Which of the following provisions require a firm to buy all of a particular item from a single
firm?
A) tying arrangement
B) requirements contracts
C) exclusive dealing
D) territorial confinement
E) quantity discrimination
Skill: Level 2: Using definitions
Section: Checkpoint 17.4
Author: SB
AACSB: Reflective thinking
21) Which of the following is always a violation of the antitrust law?
A) price fixing
B) price discrimination
C) resale price maintenance
D) predatory pricing
E) tying arrangements
Skill: Level 2: Using definitions
Section: Checkpoint 17.4
Author: DD
AACSB: Reflective thinking
49
Copyright © 2011 Pearson Education, Inc.
22) Price fixing
A) always is a violation of the law.
B) is allowed only if otherwise a firm would go bankrupt.
C) is one of the business practices prohibited by the Clayton Act.
D) a violation of the law only when it is combined with predatory pricing.
E) is legal if the businesses have received prior clearance from the Justice Department.
Skill: Level 2: Using definitions
Section: Checkpoint 17.4
Author: SB
AACSB: Reflective thinking
23) Under what conditions would it be legal for two bakeries in Minneapolis to explicitly agree
to raise their prices by 5 percent?
A) if the price rise was not predatory
B) if the price rise did not measurably increase producer surplus
C) never
D) if the price rise did not harm consumers in the long run by reducing competition
E) if the price rise was necessary to keep one or both bakeries from closing.
Skill: Level 2: Using definitions
Section: Checkpoint 17.4
Author: JC
AACSB: Reflective thinking
24) Setting a price so low that competitors are driven out of a market and then boosting the price
is called
A) predatory pricing.
B) a tying arrangement.
C) resale price maintenance.
D) price fixing.
E) price discrimination.
Skill: Level 2: Using definitions
Section: Checkpoint 17.4
Author: CD
AACSB: Reflective thinking
50
Copyright © 2011 Pearson Education, Inc.
25) When an oligopoly reduces its price with the intent of driving away its competitors, it is said
to be engaging in
A) pricing differential.
B) predatory pricing.
C) price fixing.
D) a price-tying agreement.
E) price discrimination.
Skill: Level 2: Using definitions
Section: Checkpoint 17.4
Author: SA
AACSB: Reflective thinking
26) Economists are skeptical that ________ occurs very often because firms engaging in it are
certain to suffer an economic loss for a period of time.
A) a tying arrangement
B) inefficient resale price maintenance
C) predatory pricing
D) efficient resale price maintenance
E) exclusive dealing
Skill: Level 2: Using definitions
Section: Checkpoint 17.4
Author: CD
AACSB: Reflective thinking
27) _______ is an agreement between a manufacturer and a distributor on the price at which a
product will be resold.
A) Resale price maintenance
B) Price discrimination
C) Price fixing
D) Predatory pricing
E) A tying arrangement
Skill: Level 2: Using definitions
Section: Checkpoint 17.4
Author: DD
AACSB: Reflective thinking
51
Copyright © 2011 Pearson Education, Inc.
28) The manufacturer of perfume enters into an agreement with several distributors about the
price at which the distributors can resell the perfume. The manufacturers who do not agree to the
pricing suggestion are not able to sell the perfume. The agreement between manufacturers and
distributors is
A) resale price maintenance.
B) an interlocking dealership chain.
C) always inefficient.
D) a tying arrangement.
E) an example of an exclusive deal.
Skill: Level 2: Using definitions
Section: Checkpoint 17.4
Author: CD
AACSB: Reflective thinking
29) Resale price maintenance can be illegal
A) under the Clayton Act.
B) under the Sherman Act.
C) only if the distributors engage in predatory pricing.
D) if distributors tell the manufacturer the maximum price at which they will sell the product.
E) only when it is combined with territorial confinement.
Skill: Level 2: Using definitions
Section: Checkpoint 17.4
Author: CD
AACSB: Reflective thinking
30) Resale price maintenance is efficient if
A) it is used in conjunction with a tying arrangement.
B) the manufacturer does not engage in predatory pricing.
C) retailers charge the lowest price for the product.
D) it enables a manufacturer to induce an efficient standard of service from retailers.
E) it takes the place of an exclusive deal.
Skill: Level 2: Using definitions
Section: Checkpoint 17.4
Author: CD
AACSB: Reflective thinking
52
Copyright © 2011 Pearson Education, Inc.
31) The government believes that which entry barrier has allowed Microsoft to gain monopoly
power?
A) ownership of the entire supply of a resource
B) patents
C) trademarks
D) economies of scale and network economies
E) territorial confinement
Skill: Level 1: Definition
Section: Checkpoint 17.4
Author: JC
AACSB: Reflective thinking
32) The U.S. courts found Microsoft
A) did not violate antitrust law.
B) violated the Sherman Act.
C) violated the Cellar-Kefauver Act.
D) engaged in predatory pricing.
E) violated the price discrimination clause of the Clayton Act.
Skill: Level 1: Definition
Section: Checkpoint 17.4
Author: CD
AACSB: Reflective thinking
33) If the Herfindahl-Hirschman Index in an industry is above 1,800, a merger that increases the
Herfindahl-Hirschman Index by over 50 points will
A) be allowed by the government.
B) be challenged by the government.
C) be encouraged by the government.
D) increase competition in that industry.
E) never be allowed to happen.
Skill: Level 1: Definition
Section: Checkpoint 17.4
Author: JC
AACSB: Reflective thinking
53
Copyright © 2011 Pearson Education, Inc.
34) The Federal Trade Commission uses the ________ to help determine whether to challenge a
possible merger.
A) the Sherman Act
B) the Clayton Act
C) the Herfindahl-Hirschman Index
D) antitrust law of natural monopolies
E) the four-firm concentration ratio
Skill: Level 1: Definition
Section: Checkpoint 17.4
Author: CD
AACSB: Reflective thinking
35) If an industry has a Herfindahl-Hirschman index of 800, it is considered a
A) competitive market.
B) moderately concentrated market.
C) concentrated market.
D) monopoly.
E) small market.
Skill: Level 2: Using definitions
Section: Checkpoint 17.4
Author: SB
AACSB: Reflective thinking
36) If the Herfindahl-Hirschman Index (HHI) for a market is between 1,000 and 1,800, the
Federal Trade Commission will examine
A) all mergers.
B) no mergers.
C) mergers that raise the HHI by 100 or more points.
D) mergers that raise the HHI by 100 or fewer point.
E) mergers that lower the HHI by 100 or more points.
Skill: Level 2: Using definitions
Section: Checkpoint 17.4
Author: SA
AACSB: Reflective thinking
54
Copyright © 2011 Pearson Education, Inc.
37) Suppose there are 6 firms in an industry with the following market shares. If the two smallest
firms want to merge, how will the Federal Trade Commission reply?
Firm 1: 30
Firm 2: 25
Firm 3: 25
Firm 4: 10
Firm 5: 7
Firm 6: 3
A) The firms will be allowed to merge and compete with the larger firms.
B) The firms will be challenged because the merger will raise the HHI by more than 50 points.
C) The firms will not be allowed to merge.
D) The firms will be challenged because the merger will raise the HHI by more than 100 points.
E) The firms will be challenged because the merger will raise the HHI by more than 250 points.
Skill: Level 4: Applying models
Section: Checkpoint 17.4
Author: CD
AACSB: Analytical reasoning
38) Federal Trade Commission guidelines state that it will examine mergers in markets for which
the Herfindahl-Hirschman Index is
A) a positive number.
B) below 1,000 points.
C) between 1,000 and 1,800 and the merger would reduce the index by 100 points.
D) between 1,000 and 1,800, and the merger would increase the index by 100 points.
E) more than 1,800.
Skill: Level 2: Using definitions
Section: Checkpoint 17.4
Author: MR
AACSB: Reflective thinking
39) Suppose that an industry has an HHI of 1,900. Two firms in the industry want to merge.
Under which conditions will the Federal Trade Commission challenge the merger?
A) The market is considered competitive, so the merger will not be challenged.
B) The merger will be challenged if it raises the HHI by 100 or more points.
C) The merger will be challenged if it raises the HHI by 50 or more points.
D) The merger will be challenged if it raises the HHI by 200 or more points.
E) The merger will be challenged if it raises the HHI by 500 or more points.
Skill: Level 2: Using definitions
Section: Checkpoint 17.4
Author: CD
AACSB: Reflective thinking
55
Copyright © 2011 Pearson Education, Inc.
40) In order for the Federal Trade Commission to consider an industry concentrated, the industry
must have a Herfindahl-Hirschman Index of
A) less than 1,000.
B) between 1,000 and 1,400.
C) greater than 1,800.
D) less than zero.
E) between 1,400 and 1,800.
Skill: Level 2: Using definitions
Section: Checkpoint 17.4
Author: SB
AACSB: Reflective thinking
41) In the case of two recently proposed mergers, PepsiCo buying 7-Up and Coca-Cola buying
Dr. Pepper, the government blocked
A) the PepsiCo but not the Coca-Cola merger.
B) the Coca-Cola but not the PepsiCo merger.
C) both mergers.
D) neither merger.
E) the Coca-Cola merger and tried to block, but failed, the PepsiCo merger.
Skill: Level 2: Using definitions
Section: Checkpoint 17.4
Author: SB
AACSB: Reflective thinking
42) The first antitrust act was ________ passed in ________.
A) the Clayton Act; 1890
B) the Sherman Act; 1890
C) the Clinton Act; 1999
D) the Rockefeller Act; 1890
E) the Clayton Act; 1914
Skill: Level 1: Definition
Section: Checkpoint 17.4
Author: STUDY GUIDE
AACSB: Reflective thinking
56
Copyright © 2011 Pearson Education, Inc.
43) The Clayton Act
A) replaced the Sherman Act.
B) along with its amendments, outlawed several business practices if they substantially lessened
competition or created monopoly.
C) along with its amendments, prohibited all business practices that substantially lessen
competition or create monopoly.
D) was the first anti-trust law in the United States.
E) was repealed in 1985.
Skill: Level 1: Definition
Section: Checkpoint 17.4
Author: STUDY GUIDE
AACSB: Reflective thinking
44) Which of the following is (are) prohibited if it substantially lessens competition or creates a
monopoly?
i. price discrimination
ii. tying arrangements
iii. exclusive dealing
A) i only
B) ii only
C) ii and iii
D) iii only
E) i, ii, and iii
Skill: Level 1: Definition
Section: Checkpoint 17.4
Author: STUDY GUIDE
AACSB: Reflective thinking
45) If Polka Cola agrees to sell its cola to a retailer only if the retailer also buys a lemon-lime
drink, Polka Up, then Polka Cola is engaged in
A) a tying arrangement.
B) a requirement contracts.
C) an exclusive deal.
D) territorial confinement.
E) price discrimination.
Skill: Level 1: Definition
Section: Checkpoint 17.4
Author: STUDY GUIDE
AACSB: Reflective thinking
57
Copyright © 2011 Pearson Education, Inc.
46) Which of the following is always illegal?
A) possessing a very large market share
B) selling at a price below other producers because of efficiency
C) price fixing
D) attempting to merge with a competitor
E) price discrimination
Skill: Level 2: Using definitions
Section: Checkpoint 17.4
Author: STUDY GUIDE
AACSB: Reflective thinking
47) Resale price maintenance
A) can lead to efficiency by preventing low-price shops from being free riders.
B) can lead to inefficiency by preventing low-price shops from being free riders.
C) is always legal.
D) is a clear example of predatory pricing.
E) is an example of a tying arrangement.
Skill: Level 2: Using definitions
Section: Checkpoint 17.4
Author: STUDY GUIDE
AACSB: Reflective thinking
48) Predatory pricing occurs when a firm sets a ________ price to drive competitors out of
business with the intention of then setting a ________ price.
A) monopoly; high
B) monopoly; low
C) low; monopoly
D) low; low
E) high; monopoly
Skill: Level 1: Definition
Section: Checkpoint 17.4
Author: STUDY GUIDE
AACSB: Reflective thinking
58
Copyright © 2011 Pearson Education, Inc.
49) In the case against Microsoft, it was claimed that combining Internet Explorer and Windows
was
A) predatory pricing.
B) an illegal tying agreement.
C) creating one product that is convenient for the consumers.
D) illegal territorial confinement.
E) an inefficient resale maintenance agreement.
Skill: Level 1: Definition
Section: Checkpoint 17.4
Author: STUDY GUIDE
AACSB: Reflective thinking
50) In a concentrated industry with a Herfindahl-Hirschman Index that exceeds 1,800, the
Federal Trade Commission will challenge any merger that increases the Herfindahl-Hirschman
index by a minimum of
A) 50 points.
B) 100 points.
C) 1,000 points.
D) 1,800 points.
E) 10,000 points.
Skill: Level 2: Using definitions
Section: Checkpoint 17.4
Author: STUDY GUIDE
AACSB: Reflective thinking
59
Copyright © 2011 Pearson Education, Inc.
17.5 Chapter Figures
The figure above shows the market for airplanes.
1) Suppose the airplane market is an oligopoly. If the firms act as a monopolist, the price will be
________ and if the firms act as competitors the price will be ________.
A) $13 million per plane; $1 million per plane
B) $1 million per plane; $13 million per plane
C) $13 million per plane; $13 million per plane
D) $1 million per plane; $1 million per plane
E) None of the above answers is correct.
Skill: Level 3: Using models
Section: Checkpoint 17.2
Author: MR
AACSB: Analytical reasoning
60
Copyright © 2011 Pearson Education, Inc.
2) Suppose the airplane market is an oligopoly. According to the figure above, if the firms act as
a monopolist, the quantity produced will be ________ planes per week and if the firms act as
competitors the quantity produced will be ________ planes per week.
A) 6; 12
B) 12; 6
C) 0; 6
D) 12; 0
E) None of the above answers is correct.
Skill: Level 3: Using models
Section: Checkpoint 17.2
Author: MR
AACSB: Analytical reasoning
3) Suppose the airplane market is an oligopoly. According to the figure above, the price can
range as high as ________ and as low as ________.
A) $13 million per plane; $1 million per plane
B) $1 million per plane; $13 million per plane
C) $13 million per plane; $13 million per plane
D) $1 million per plane; $1 million per plane
E) None of the above answers is correct.
Skill: Level 3: Using models
Section: Checkpoint 17.2
Author: MR
AACSB: Analytical reasoning
4) Suppose the airplane market is an oligopoly. According to the figure above, the quantity
produced can range as high as ________ planes per week and as low as ________ planes per
week.
A) 6; 12
B) 12; 6
C) 0; 6
D) 12; 0
E) None of the above answers is correct.
Skill: Level 3: Using models
Section: Checkpoint 17.2
Author: MR
AACSB: Analytical reasoning
61
Copyright © 2011 Pearson Education, Inc.
17.6 Integrative Questions
1) A characteristic common in both oligopoly and monopolistic competition is:
A) a small number of firms compete in the market.
B) natural or legal barriers prevent the entry of new firms into the market.
C) each firm faces a downward-sloping demand curve.
D) the firms in the market are interdependent.
E) each firm has a large share of the market.
Skill: Level 2: Using definitions
Section: Integrative
Author: DD
AACSB: Reflective thinking
2) If the HHI for an industry equals 3,200,
A) firms in the industry must enter a cartel in order to earn an economic profit.
B) firms in the industry are most likely to earn zero economic profit.
C) the industry is probably an oligopoly.
D) firms in the industry are likely to act independently of each other.
E) the industry is almost surely monopolistic competition.
Skill: Level 2: Using definitions
Section: Integrative
Author: CD
AACSB: Reflective thinking
3) Which of the following are characteristics of an oligopoly?
i) The HHI for an oligopoly is between 100 and 1800.
ii) There are a few firms that compete.
iii) The firms can increase their profit by forming a cartel.
A) i and ii
B) i and iii
C) ii and iii
D) i, ii, and iii
E) i only.
Skill: Level 2: Using definitions
Section: Integrative
Author: CD
AACSB: Reflective thinking
62
Copyright © 2011 Pearson Education, Inc.
4) When a market has barriers to entry,
A) then in the long run it is possible for the firms to incur economic losses.
B) then in the long run the only possible outcome for the firms is zero economic profit.
C) then in the long run it might be possible for the firms to make economic profits.
D) oligopolies cannot be created.
E) the HHI almost always falls below 1,000.
Skill: Level 2: Using definitions
Section: Integrative
Author: CD
AACSB: Reflective thinking
5) The figure above shows the market demand curve and the ATC curve for a firm. If all firms in
the market have the same ATC curve, then ________ limit the market to 3 firms.
A) economies of scale
B) a "tit for tat" strategy
C) collusion
D) a Nash equilibrium
E) legal requirements
Skill: Level 3: Using models
Section: Integrative
Author: CD
AACSB: Analytical reasoning
63
Copyright © 2011 Pearson Education, Inc.
6) The figure above shows the market demand curve and the ATC curve for a firm. Each firm in
the market has the same ATC curve. If the firms in the industry agree to form a cartel, the firms
in the industry earn an economic profit if there are ________ firms, each producing ________
units per hour.
A) 3; 4,000
B) 4; 3,000
C) 2; 6,000
D) 2; 4,000
E) 2; 12,000
Skill: Level 3: Using models
Section: Integrative
Author: CD
AACSB: Analytical reasoning
7) If a legal oligopoly exists,
A) the firms always engage in a "tit for tat" strategy.
B) there is the possibility that the market is large enough for more firms.
C) the firms never collude.
D) monopoly profits cannot be earned.
E) the firms may legally merge and become a monopoly.
Skill: Level 3: Using models
Section: Integrative
Author: CD
AACSB: Reflective thinking
8) A cartel is
A) another name for a firm in an oligopoly.
B) a collusive agreement among a number of firms.
C) a government body that regulates an industry.
D) an antitrust law.
E) a type of regulation that focuses on quantities rather than price.
Skill: Level 1: Definition
Section: Integrative
Author: SB
AACSB: Reflective thinking
64
Copyright © 2011 Pearson Education, Inc.
9) Firms operating in an oligopoly
A) always compete on price.
B) always compete on price, product quality and marketing.
C) can earn monopoly profits but there is no assurance that they will do so.
D) usually achieve the competitive outcome.
E) always earn monopoly profits.
Skill: Level 3: Using models
Section: Integrative
Author: CD
AACSB: Reflective thinking
10) The range of output for a duopoly ranges between the
A) perfectly competitive outcome and the monopolistically competitive outcome.
B) efficient scale and the perfectly competitive outcome.
C) minimum of ATC and the efficient scale.
D) monopoly outcome and the perfectly competitive outcome.
E) short-run perfectly competitive outcome and the long-run perfectly competitive outcome.
Skill: Level 3: Using models
Section: Integrative
Author: CD
AACSB: Reflective thinking
11) What is the conclusion in the prisoners' dilemma?
A) Firms should not enter a legal duopoly.
B) Two prisoners acting in their own best interest harm their joint interest.
C) There is no Nash equilibrium available to the prisoners.
D) Prisoners do not act interdependently.
E) Duopolies almost always reach their best outcome.
Skill: Level 3: Using models
Section: Integrative
Author: CD
AACSB: Reflective thinking
65
Copyright © 2011 Pearson Education, Inc.
12) Which of the following can be games played by firms in an oligopoly?
i. choosing how much to spend on advertising
ii. choosing how much to spend on R&D
iii. choosing to enter a legal duopoly
A) i and ii
B) i and iii
C) ii and iii
D) ii only
E) iii only
Skill: Level 2: Using definitions
Section: Integrative
Author: CD
AACSB: Reflective thinking
13) Tying arrangements are
A) illegal if they substantially lessen competition.
B) used by regulators to force a monopoly to produce an efficient amount of production.
C) used by regulators to force a monopoly to charge an efficient price.
D) illegal according to the Sherman Act.
E) necessary in order for a firm to price discriminate.
Skill: Level 2: Using definitions
Section: Integrative
Author: CD
AACSB: Reflective thinking
14) Resale price maintenance is a form of
A) regulation.
B) marginal cost pricing.
C) average cost pricing.
D) agreeing about the price that will be charged.
E) setting the price cap under price cap regulation.
Skill: Level 2: Using definitions
Section: Integrative
Author: CD
AACSB: Reflective thinking
66
Copyright © 2011 Pearson Education, Inc.
15) If a firm engages in predatory pricing, it
A) is following marginal cost pricing.
B) is following average cost pricing.
C) sets a low price to drive rivals out of business.
D) has been regulated using a price cap.
E) is guilty of price fixing.
Skill: Level 2: Using definitions
Section: Integrative
Author: CD
AACSB: Reflective thinking
16) Because it was found guilty of violating the Sherman Act, Microsoft will be subject to
A) rate of return regulation.
B) marginal cost pricing.
C) price cap regulation.
D) predatory pricing.
E) None of the above answers is correct.
Skill: Level 1: Definition
Section: Integrative
Author: CD
AACSB: Reflective thinking
17) When the Federal Trade Commission decides whether to allow firms in an industry to merge,
it uses the ________ to guide its decision.
A) social interest theory
B) HHI
C) capture theory
D) Sherman Act
E) predatory pricing theory
Skill: Level 1: Definition
Section: Integrative
Author: CD
AACSB: Reflective thinking
67
Copyright © 2011 Pearson Education, Inc.
17.7 Essay: What Is Oligopoly?
1) Describe the characteristics of an oligopoly.
Skill: Level 1: Definition
Section: Checkpoint 17.1
Author: CD
AACSB: Communication
2) "Because firms in an oligopoly are so large, they do not need to consider each other's actions."
Is the previous statement correct or incorrect? Explain your answer.
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Author: SA
AACSB: Communication
3) What market structures other than oligopoly have the characteristic of one firm's actions
affecting the actions of its competitors? Explain your answer.
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Author: TS
AACSB: Communication
68
Copyright © 2011 Pearson Education, Inc.
4) What is a cartel?
Skill: Level 1: Definition
Section: Checkpoint 17.1
Author: CD
AACSB: Communication
5) Explain what a cartel is and the difficulties faced in maintaining a cartel.
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Author: TS
AACSB: Communication
6) Why are cartels among firms usually kept secret?
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Author: JC
AACSB: Communication
7) What is the legal status of a cartel among firms in the United States?
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Author: JC
AACSB: Reflective thinking
69
Copyright © 2011 Pearson Education, Inc.
17.8 Essay: The Oligopolist's Dilemma
1) "If firms in an oligopoly operate as a monopoly, the industry produces the most output and if
they operate as perfect competitors, the industry produces the least output." Is the previous
statement correct or incorrect? Why?
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Author: MR
AACSB: Communication
2) What is the best outcome for society: When firms in an oligopoly operate as a monopoly or
when they act as perfect competitors? Briefly explain your answer.
Skill: Level 5: Critical thinking
Section: Checkpoint 17.2
Author: MR
AACSB: Communication
3) In the Boeing/Airbus oligopoly example discussed in the text, why did Boeing and Airbus
have an incentive to produce more planes than the monopoly outcome?
Skill: Level 3: Using models
Section: Checkpoint 17.2
Author: MR
AACSB: Communication
70
Copyright © 2011 Pearson Education, Inc.
4) The above figure shows the market for the three moving companies in a small nation. If the
movers act as perfect competitors, what is the price per mile and the number of miles per year? If
the movers collude and act as a single monopoly, what is the price per mile and the number of
lines per year?
Skill: Level 3: Using models
Section: Checkpoint 17.2
Author: WM
AACSB: Analytical reasoning
71
Copyright © 2011 Pearson Education, Inc.
5) The figure above shows a the market demand curve for a market with three firms. It also
shows a firm's marginal cost curve. In this oligopoly, what is the range of output and prices?
Why does this range of outcomes exist?
Skill: Level 3: Using models
Section: Checkpoint 17.2
Author: CD
AACSB: Analytical reasoning
72
Copyright © 2011 Pearson Education, Inc.
6) The table above has the market demand schedule in an industry that has two firms in it. The
marginal cost of this product is zero because these two firms have exclusive ownership of the
resource and it does not cost any additional amount to produce additional units.
a. If the firms cooperate with each other so that they operate as a monopoly, what price will
they charge and what (total) output will they produce?
b. If the firms cannot cooperate but instead behave as perfect competitors, what will be the price
and the (total) output they produce?
Skill: Level 4: Applying models
Section: Checkpoint 17.2
Author: SA
AACSB: Analytical reasoning
17.9 Essay: Game Theory
1) What three characteristics do all games have in common?
Skill: Level 2: Using definitions
Section: Checkpoint 17.3
Author: SB
AACSB: Reflective thinking
73
Copyright © 2011 Pearson Education, Inc.
2) What is a Nash equilibrium? Is this equilibrium the best outcome for the players? Give an
example.
Skill: Level 1: Definition
Section: Checkpoint 17.3
Author: CD
AACSB: Communication
3) "A Nash equilibrium occurs when both parties to a game end up worse off as a result of the
decisions that are made." Is the previous definition of a Nash equilibrium correct or incorrect?
Skill: Level 2: Using definitions
Section: Checkpoint 17.3
Author: JC
AACSB: Communication
74
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4) OPEC, the Organization of Petroleum Exporting Countries, was formed in Baghdad in 1960.
Since its formation, this cartel has suffered from a major problem with respect to the quota
(limit) of output it assigns each member nation. What is OPEC's goal and what sort of quota do
you think the cartel assigns? How and why do nations cheat on their quota? What happens when
a nation cheats on its quota?
Skill: Level 5: Critical thinking
Section: Checkpoint 17.3
Author: JC
AACSB: Communication
5) Why do oligopoly firms find it difficult to cooperate and not cheat on a cartel agreement?
Skill: Level 2: Using definitions
Section: Checkpoint 17.3
Author: PH
AACSB: Communication
6) In a cartel, how does the number of firms affect the likelihood that the cartel will be able to
successfully maintain a high price?
Skill: Level 2: Using definitions
Section: Checkpoint 17.3
Author: PH
AACSB: Communication
75
Copyright © 2011 Pearson Education, Inc.
7) What is the dilemma faced by firms in oligopoly?
Skill: Level 4: Applying models
Section: Checkpoint 17.3
Author: SB
AACSB: Communication
8) "The duopolists' dilemma occurs when firms in a duopoly coordinate their decisions to
achieve the best possible outcome." Is the previous statement correct or incorrect? Why?
Skill: Level 2: Using definitions
Section: Checkpoint 17.3
Author: JC
AACSB: Communication
9) What is game theory and what light does it shed on the duopolists' dilemma?
Skill: Level 2: Using definitions
Section: Checkpoint 17.3
Author: SA
AACSB: Communication
76
Copyright © 2011 Pearson Education, Inc.
10) Does an oligopoly produce the efficient quantity of output or does it create a deadweight
loss? Do the firms want to produce the efficient quantity of output? Explain your answer.
Skill: Level 3: Using models
Section: Checkpoint 17.3
Author: CD
AACSB: Communication
77
Copyright © 2011 Pearson Education, Inc.
11) Sally's Mom is pretty sure her twins, Tim and John, together cut the hair off Sally's Barbie
doll. She talks to them separately and gives them the following options. If they both confess they
will have to pay Sally $10 each. If Tim confesses and John does not confess, Tim pays $15 and
John pays $8. If Tim does not confess and John confesses, Tim has to pay $8 and John $15. If
both do not confess, they both pay her $14. Sally's Mom has them in separate rooms and they
cannot talk to each other.
a. Complete the payoff matrix below.
b. If they reach the Nash equilibrium, what will Tim and John do?
Skill: Level 4: Applying models
Section: Checkpoint 17.3
Author: SA
AACSB: Analytical reasoning
78
Copyright © 2011 Pearson Education, Inc.
12) Two competing firms in a duopoly must decide whether or not to offer consumers a coupon
for their good. The payoff matrix above represents the daily profit available to the firms under
the different coupon strategies.
a. What strategies and payoffs are represented by quadrant A?
b. What strategy will Firm 1 pursue if it believes that Firm 2 is offering a coupon?
c. What quadrant represents the equilibrium that will result if the firms act independently
(compete)?
d. What quadrant represents the equilibrium that will result if the firms successfully collude?
Skill: Level 4: Applying models
Section: Checkpoint 17.3
Author: SB
AACSB: Analytical reasoning
79
Copyright © 2011 Pearson Education, Inc.
13) Two firms are introducing an improved version of their toothpastes. They must decide
whether or not to advertise their products. The table above gives the payoff matrix in terms of the
economic profits they expect in each case. The payoffs are in terms of millions of dollars.
a. What is the Nash equilibrium for the game?
b. If they could cooperate, what strategy would they prefer? What would be the payoff?
Skill: Level 4: Applying models
Section: Checkpoint 17.3
Author: SA
AACSB: Analytical reasoning
80
Copyright © 2011 Pearson Education, Inc.
14) Two firms are competing in a duopoly and are trying to decide which price to set. The two
prices under consideration are a high monopoly price and a low competitive level. If both seller
A and seller B chose the monopoly price, each will earn $20 million of economic profit.
However, if one picks the monopoly price while the other picks the competitive price, the high-
price firm will lose $1 million while the low-price firm will earn $32 million. If both sell at the
competitive level, they both earn a normal profit. Complete the payoff matrix below and
determine the Nash equilibrium.
Skill: Level 4: Applying models
Section: Checkpoint 17.3
Author: TS
AACSB: Analytical reasoning
81
Copyright © 2011 Pearson Education, Inc.
15) Suppose two companies, Sony and Magnavox, are competing in a duopoly. If both
companies charge a high price, they each earn $700 million in economic profit. If both
companies charge a low price, they each earn $500 million in economic profit. If one company
charges a high price and the other a low price, the company charging the higher price earns $450
million in economic profit and the company charging the lower price earns $800 million in
economic profit.
a. Complete the payoff matrix below for Sony and Magnavox.
b. Find the Nash equilibrium.
Skill: Level 4: Applying models
Section: Checkpoint 17.3
Author: SB
AACSB: Analytical reasoning
82
Copyright © 2011 Pearson Education, Inc.
17.10 Essay: Antitrust Law
1) Does section 2 of the Sherman Act make it a felony to "attempt" to monopolize an industry or
must the attempt succeed before it is a felony?
Skill: Level 2: Using definitions
Section: Checkpoint 17.4
Author: JC
AACSB: Reflective thinking
2) "The Clayton Act repealed the Sherman Act so that only the Clayton Act remains in force." Is
the previous statement correct or incorrect?
Skill: Level 1: Definition
Section: Checkpoint 17.4
Author: SA
AACSB: Reflective thinking
3) What are the actions that are prohibited according to the Clayton Act and its amendments.
What conditions must be met for these actions to be prohibited?
Skill: Level 1: Definition
Section: Checkpoint 17.4
Author: CD
AACSB: Communication
83
Copyright © 2011 Pearson Education, Inc.
4) Briefly explain resale price maintenance. Is it legal or illegal? Does it create efficiency or
inefficiency?
Skill: Level 2: Using definitions
Section: Checkpoint 17.4
Author: CD
AACSB: Communication
5) What is meant by the term "exclusive dealing"? Give an example of an exclusive deal. When
is it illegal?
Skill: Level 2: Using definitions
Section: Checkpoint 17.4
Author: SB
AACSB: Communication
6) If Sony required all its retailers not to sell televisions from other companies, Sony would be
engaging in what kind of activity? Is Sony's requirement legal or does it violate the Clayton Act?
Skill: Level 2: Using definitions
Section: Checkpoint 17.4
Author: SA
AACSB: Communication
84
Copyright © 2011 Pearson Education, Inc.
7) Explain how the courts have ruled on price fixing.
Skill: Level 2: Using definitions
Section: Checkpoint 17.4
Author: PH
AACSB: Communication
8) If price fixing is necessary because without it a firm will go bankrupt, is the price fixing legal?
Skill: Level 2: Using definitions
Section: Checkpoint 17.4
Author: MR
AACSB: Reflective thinking
9) Describe the Department of Justice's claims against Microsoft.
Skill: Level 2: Using definitions
Section: Checkpoint 17.4
Author: PH
AACSB: Communication
10) What are the merger rules used by the Federal Trade Commission to help decide whether
firms are allowed to merge?
Skill: Level 1: Definition
Section: Checkpoint 17.4
Author: CD
AACSB: Communication
85
Copyright © 2011 Pearson Education, Inc.
11) In a market with a Herfindahl-Hirschman Index of 2,000, according to their guidelines will
the Department of Justice challenge a merger that would increase the index by 50?
Skill: Level 2: Using definitions
Section: Checkpoint 17.4
Author: SA
AACSB: Communication
12) "If an industry's Herfindahl-Hirschman Index is below 1,000, a merger between any two
firms in that industry will be disallowed." Comment on the accuracy of the previous statement.
Skill: Level 2: Using definitions
Section: Checkpoint 17.4
Author: JC
AACSB: Communication
13) In 1911, Standard Oil Co. was declared a monopoly by the government under the Sherman
Act and the company was ordered to break itself up into competing companies. Two oil
companies, Exxon and Mobil, were the result of this breakup. A few years ago, Exxon and Mobil
merged again to form ExxonMobil Corporation. Why did the government allow this merger
now?
Skill: Level 5: Critical thinking
Section: Checkpoint 17.4
Author: SA
AACSB: Communication
86
Copyright © 2011 Pearson Education, Inc.
14) Suppose the industry for washing machines has only four firms. The market shares are: Firm
A, 40 percent; Firm B, 20 percent; Firm C 20, percent; and Firm D, 20 percent.
a. What is the Herfindahl-Hirschman Index (HHI)?
b. If Firms C and D were to announce a merger, would the Federal Trade Commission oppose
the merger?
Skill: Level 3: Using models
Section: Checkpoint 17.4
Author: WM
AACSB: Analytical reasoning
15) A market has ten firms, whose market shares are given in the table above.
a. If firms I and J wanted to merge, according to the Department of Justice guidelines, would
the Federal Trade Commission challenge the merger?
b. If firms A and B wanted to merge, according to the Federal Trade Commission guidelines,
would the Federal Trade Commission challenge the merger?
Skill: Level 3: Using models
Section: Checkpoint 17.4
Author: MR
AACSB: Analytical reasoning
